Dollar Higher As Bernanke Said Inflation 'Too High'

Daily Forex Fundamentals | Written by CMS Forex | Jul 17 08 01:12 GMT |

The dollar rose against its rivals Wednesday supported by plunging crude oil prices and rising stocks. Federal Reserve Chairman Ben S. Bernanke's comments that dollar intervention, although rare, can be justified when markets become disorderly, also supported the greenback. The GBP/USD fell following weak UK labor market data. The USD/CAD was little changed at the 1.00 support despite falling energy prices. The AUD/USD fell as Reserve Bank of Australia Governor Glenn Stevens said slowing demand will ease inflationary pressures. The yen and Swiss franc declined on increased risk appetite as financial and technology stocks rallied sharply. The EUR/USD fell as crude oil dropped for a second day and hit a 3-week low on a surprise increase in US oil inventories. The pair was also pressured by Bernanke's comments that US inflation 'is too high' and the Fed's aim is to achieve price stability. The EUR/USD is just above the 1.58-support. If this support is broken, the pair may test the 1.56-area support. Financial and Economic News and Comments US & Canada US consumer prices increased a more-than-forecast 1.1% m/m in June, the second-highest rise since 1982 and the highest since 2005, data from the Labor Department showed. The CPI rose 5.0% y/y, the highest rate since May 1991. Most of the CPI rise was due to energy prices, which rose 6.6% m/m and 24.7% y/y in June. Food and beverage prices increased 0.7% m/m and 5.2% y/y. The core CPI, which excludes food and energy, increased a more-than-expected 0.3% m/m in June, up 2.4% y/y. Excluding just energy, the CPI increased 0.4% m/m and 2.9% y/y. The underlying trend in inflation remains upward and the Federal Reserve should seriously focus on inflation and raise interest rates US industrial production increased a more-than-expected 0.5% m/m in June, after declining 0.2% m/m in May, according to data from the Federal Reserve. Industrial production increased 0.3% y/y. Capacity utilization rose to a more-than-forecast 79.9% in June, following an upwardly revised 79.6% in May. The 1972-2007 average is 81.0%. Manufacturing production gained 0.2% m/m in June, after slipping 0.1% m/m in May. The gain was attributable to a 5.4% increase in motor vehicles and parts due to the end of the American Axle strike. Manufacturing capacity utilization held steady at 77.6%. The NAHB/Wells Fargo sentiment index declined to 16 in July from 18 in June, indicating confidence among US homebuilders dropped to a record low in July, the National Association of Homebuilders/Wells Fargo said. The data signals the US housing recession will continue. Foreign investors were net sellers of US securities in May, failing to provide the capital inflows needed to offset the trade deficit for the month. Monthly net purchases by overseas investors totaled -$2.5 billion in May. The trade deficit for May totaled $166 billion. Net long-term capital inflows totaled $67.0 billion, down from April's revised $111.9 billion, the Treasury Department reported. Federal Reserve Chairman Ben S. Bernanke said US inflation 'is too high,' reiterating that the Fed's aim is to achieve price stability. 'It is very important for us to maintain price stability,' Bernanke said. The rise in energy and commodity prices is due to 'factors out of the control of the Federal Reserve,' he said. The US needs to have an energy strategy and 'it would have been better to address this some time ago.' An energy strategy could even have beneficial effects on energy prices in the near term if less concern over supply and demand imbalances is reflected in futures prices, he said. Bernanke also said foreign-exchange intervention should be done rarely and that he expects the dollar to reflect a stronger US economy over the medium term. He said temporary action on currencies may be justified if something disorderly occurs in markets. Some Fed policy makers in June said an increase in the benchmark US lending rate 'would be appropriate very soon,' minutes of the June 24-25 FOMC meeting released today showed. 'Members generally agreed that the risks to growth had diminished somewhat since the time of the last FOMC meeting while the upside risks to inflation had increased….With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate,' the minutes said. Dallas Fed Bank President Richard Fisher dissented in favor of a rate increase at the June meeting. Fed bank presidents and the Board of Governors also discussed their discount window facility for investment banks, known as the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF), which allows dealers to temporarily swap mortgage bonds and asset-backed securities for the Fed's holdings of Treasury notes. 'In view of the continuing significant strains in financial markets, participants also discussed the possibility of extending the PDCF and the TSLF past year-end….participants exchanged views on longer-run issues regarding appropriate arrangements for supervision and regulation of investment banks and other securities dealers and for the access of such firms to central bank liquidity, as well as on possible measures to strengthen financial market functioning and thus enhance financial stability,' the minutes said. Europe The eurozone inflation rate accelerated to 4.0% y/y in June, the fastest in more than 16 years, led by a 53% surge in the cost of heating oil, from 3.7% y/y in May, Eurostat said. The UK claimant count rose 15,500 in June, the biggest increase since December 1992 and exceeding forecast, following an upwardly revised 14,300 increase in May, the Office for National Statistics said. June claimant count jobless data marks a significant deterioration in the UK labor market Asia-Pacific The tertiary index declined 0.2% m/m in May, indicating a drop in Japan's demand for services as rising food and energy prices outstripped wage growth, forcing consumers to cut back, data from the Trade Ministry showed. FX Strategy Update EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY Primary Trend Positive Negative Negative Negative Negative Positive Positive Secondary Trend Neutral Neutral Neutral Neutral Neutral Positive Positive Outlook Neutral Negative Neutral Negative Neutral Positive Neutral Action Buy None None None None Buy None Current 1.5825 105.08 1.9988 1.0168 1.0017 0.9747 166.32 Start Position 1.5904 N/A 1.9941 N/A N/A 0.9716 N/A Objective N/A N/A N/A N/A N/A N/A N/A Stop 1.5770 N/A N/A N/A N/A 0.9570 N/A Support 1.5800 103.00 1.9800 1.0000 1.0000 0.9650 166.00 1.5600 101.00 1.9600 0.9900 0.9800 0.9500 162.00 Resistance 1.6020 106.00 2.0150 1.0350 1.0300 0.9900 170.00 1.6200 108.00 2.0300 1.0500 1.0400 1.0000 172.00 Hans Nilsson Capital Market Services, L.L.C. www.cmsfx.com